Strong economic growth in line with projections

OTTAWA — Canada’s economy began the year as strongly as it ended 2010, posting an impressive 0.5 per cent expansion in January that set the stage for the strongest quarter in a year.

OTTAWA — Canada’s economy began the year as strongly as it ended 2010, posting an impressive 0.5 per cent expansion in January that set the stage for the strongest quarter in a year.

The performance was in line with market projections, but still was a mild surprise because many economists had worried of a possible payback after December’s equally robust 0.5 per cent gain in gross domestic product. As well, retail sales were already known to have declined 0.3 per cent during the month.

But the auto sector, which had largely underperformed in December, came to the rescue with an 11.8 per cent jump.

The strong back-to-back months put the economy on pace to grow by as much as 4.5 per cent in the first three months of the year, analysts said. That’s two whole points more than the Bank of Canada’s now-dated estimate.

The result, if backed up by a strong employment report on April 7, is welcome news to the Harper government, which has made economic management a major campaign theme.

Analysts caution that doesn’t mean Canada’s recovery will keep accelerating, pointing to risks in the global outlook from Europe and Japan. They say growth will temper as the year progresses, much as it did in 2010.

Scotiabank economist Derek Holt warned some special factors in January’s gain also makes a repeat performance in February unlikely. In particular, the auto boost was exaggerated by shutdowns the previous month for retooling.

“It’s a total head fake. It’s reflecting the unusually timed production factor in the auto and feeder industries like fabricated metals,” Holt said. “It’s not sustainable.”

Still, most analysts believe Canada’s economy is on track to record a solid growth rate for the year of about three per cent, although skeptics remain.

The Conference Board of Canada in a new estimate issued Thursday improved its outlook only to 2.4 per cent from two. It cited the pullback in government spending federally and provincially as a key impediment to stronger growth.

The January data almost certainly means the Bank of Canada will need to revisit a lukewarm reading of the economy taken in January, say most economists, who are much more bullish than the Conference Board.

The central bank has been underestimating the economy’s strength for some time, they note. It was off by about one percentage point in the fourth quarter of 2010, and now appears to be two points shy of the first quarter 2011.

That doesn’t necessarily mean central bank governor Mark Carney is primed to start raising rates at the next opportunity in two weeks, especially with the federal election campaign in full swing.

There is very little pressure on Carney to hike rates, said Douglas Porter, deputy chief economist with BMO Capital Markets.

“I don’t think they’ll feel a great deal of urgency,” Porter said. “The Canadian dollar has been stronger than expected and acting as a brake, and if anything inflation has been lower.”

The loonie rose on the GDP report, closing up 0.19 of a cent to 103.14 cents US.

Most analysts think the Bank of Canada will keep its policy rate at one per cent until July, although further upside surprises could move that date up to late May, after the results of the May 2 election are in.

In January, Statistics Canada said growth was broadly based in both durable and non-durable goods, with makers of fabricated metal products and the auto sector posting the largest increases.

Manufacturing overall grew 2.8 per cent, compared with a 0.8 per cent gain in December.

The transportation and warehousing sector advanced 1.2 per cent, helped by higher rail shipments of iron ore and gains in the trucking industry.

On the flip side, output in mining and oil and gas declined 0.5 per cent, and retail sales slipped 0.1 per cent.